Government Debt Hysteria

I don’t spend a lot of time trying to police the economic news media — Dean Baker and Brad DeLong are much better on that — but I found myself reading a two-week-old Newsweek column by Robert Samuelson that enraged me enough to type this out. (I read it on old-fashioned paper, but here’s the WaPo version.) The title of the WaPo version is “Could America Go Broke?” and here’s the last paragraph:

“Deprived of international or domestic credit, defaulting countries in the past have suffered deep economic downturns, hyperinflation, or both. The odds may be against a wealthy society tempting that fate, but even the remote possibility underlines the precariousness and the novelty of the present situation. The arguments over whether we need more ‘stimulus’ (and debt) obscure the larger reality that past debt increasingly constricts governments’ economic maneuvering room.”

Deep economic downturns! Hyperinflation! “Precariousness and novelty of the present situation!” You’d think there was some actual reason to be afraid.

But not only does Samuelson provide no evidence that high debt levels lead to disaster, the evidence he does provide contradicts his alarmist conclusion. He says, “We have moved into uncharted territory and are prisoners of psychology. Consider Japan.” Then he considers Japan — and points out that even though Japan has the highest debt of any advanced economy, interest rates on Japanese debt have fallen to historically low levels. Somehow he says the “correct conclusion to draw” from the Japanese example is that “[major governments] can can easily borrow as much as they want until confidence that they can do so evaporates — and we don’t know when, how or whether that may happen.”

That’s not a conclusion from the Japanese example — that’s a truism that Samuelson asserted before the Japanese example and just repeated after it. (How we are on “uncharted territory” when Japan is already on that territory also escapes me.)

Samuelson doesn’t say anything that’s demonstrably false, because basically his column can be boiled down to this:

“If a government loses the ability to borrow money, bad things can happen. A government will lose the ability to borrow money when people are no longer confident that the government will pay them back. We don’t know when people will lose confidence. It may have something to do with the total amount of government debt, but then again it may not (see Japan).”

But that column is obviously not worth writing. So instead we get hyperinflation.

I’m not a fan of massive and increasing government debts in the abstract, forever. Who is? And there are real arguments to be made on this topic. But that’s not an excuse for empty rhetoric that serves no purpose. But wait — it does serve a purpose — the purpose of scaring people and politicians into not doing something about massive unemployment (because doing something might lead to hyperinflation, of course).

(After deciding to write this I realized that Dean Baker beat me to it by two weeks, but I think I’ve added onto what he had to say.)

122 responses to “Government Debt Hysteria”

Well now, this brings up an interesting question. Would you say that Japanese monetary and fiscal policy have been a success for the past twenty years? If not, would you say it is because they did not borrow and spend enough?

Excellent post. We need to aggressively continue to assert the idea that massive, relentless, and unending government spending will eventually turn into magic pixie dust and make all our problems go away. Ignore Japan. Ignore Argentina. Ignore pre-war Germany. Ignore Zimbabwe. Ignore anything that does not conform to what we want the world to look like. Just keep spending.

Krugman is also a fan of debt, to be made bigger.
He writes that “For we really need to be doing more about employment — and the debt outlook isn’t that dire, at least by comparison with past experience in advanced countries:”
And then guess which countries are taken as example?
Belgium, Italy and Japan. I wonder why he has not put Greece as well…

…..but I can’t help but wonder how he and Simon divy up their turf. (sorry if this is off-topic.) Seems to me like govt debt, defaults, economic crises and intnl finance would be Simon’s comparative advantage. So do you guys have a plant to divide up the universe? Or is it pretty much blog on whatever and see if you agree with one another?

Does anyone really believe the US or Japanese debt will ever be paid back? Isn’t the policy to simply roll it over forever?

As long as we agree that it will never be paid back, the limiting factor becomes servicing the debt. In that light, and as long as interest rates don’t spike, there is no reason to be afraid any time soon.

dw,
Maybe people are less worried about the private sector’s debt because it tends to get paid back. If it doesn’t, companies fail and stockholders lose their investment. Companies can’t run at a deficit ad infinitum and stay in business.

Obama has proposed a long term budget where the budget as a percent of GDP exceeds the long term growth rate of the economy. That is what’s known as a debt trap. Based on the demonstrated inability of this country to run a consistent balanced budget, and the monsterous liabilities the government has, most of them not honestly acccounted for, there is good reason to be worried.

See Gregor’s comment above for a list of countries that couldn’t get their acts together and control the growth of debt. It’s the road to serfdom. Buckle up fellas.

If private sector debt is less of a concern why does it cost more?
If we are headed into a debt trap why does the bond market not price accordingly? Are they all that stupid?
And please explain your comment about Obama’s budget: what is the relationship you are trying to make? How can a proportion [g/GDP] relate to the growth rate in GDP?

Increase the USG debt for what?
If it’s for bridges and roads to nowhere, forget it.
If it’s for needed infrastructure, increased practical education of the workforce, giving people a basic support level of income, medical care to support them, fine.

Here’s a question: the Japanese have a high savings rate – do they finance a lot of their govt. debt internally? How does that compare w/ the percent of US debt financed internally?

It’s not a new concept that debtors lose some control over their actions. The Chinese, and other foreign holders, do have a response available if they think all we are going to do is inflate our debt away.

Robert Samuelson isn’t as sharp as he used to be. But you know, it doesn’t bother me he complains about the U.S. national debt. It’s which times and which administrations when all of the sudden these decisions and issues bother him that annoys me.

The fact that “W” Bush, Greenspan, Phil Gramm and the Republican’s attitudes on financial regulation (including intimidation of SEC regulators for doing their jobs) led to a large percentage of the current government spending somehow magically escapes Samuelson’s observation.

Samuelson used to be respected because of his university textbook. In my opinion he’s not very relevant anymore.

Brian, your post seems to indicate that you never learned the difference between nominal and real GDP let alone the fact that debt is balanced relative to nominal and not real GDP…

And that list of countries is nonsensical on face value; the US is following the Japanese trajectory of deflation combined with higher debt. Deflation makes debt more of a burden; that’s the heart of the liquidity trap…

Where is the evidence of inflation in the US economy; the US consumer is increasing savings and rapid increases in consumption are not on the horizon; we expect 10-11% unemployment throughout 2010; CRE prices will crash through to 90s level pricing by next year.

The US in 2009 is much closer to the US in 1936 than the US in 1978… if you cannot recognize the difference, then this is a waste of time. We should be far more worried about 1937 than we should be of 1981…

This blog is basically James’ baby. Johnson just throws in material he’s ALREADY written for other things and throws a few bones to his Peterson Institute colleagues. If he doesn’t overdo it with his Peterson buddies there’s no great sin in that. Frankly, I prefer it that way since Johnson seems to think everything should be decided by some international committee.

P.S. I don’t suppose Mr. Robert Samuelson has looked at these graphs (in the link below) showing that around 1981 the U.S. National Debt shot up dramatically?? Mr. Robert Samuelson, do you know who was President in 1981?? Why do you become so blind about Saint Ronnie’s spending Mr. Robert Samuelson?? Are you planning to write a Newsweek column on that?? Looking at data from the 1980s shouldn’t be a problem for you Mr. Samuelson, seeing as how your mind has become a little dated. This is from Hale Stewart at The Huffington Post.

Yes, the vast majority of Japanese government debt is held by Japanese banks, companies, and individuals. This is one of the enormous differences between what has happened in Japan and what is happening in the U.S. The other enormous difference is that there are more dollars held all over the world (most of them by central banks) than all the other currencies put together, commodities are priced in dollars while trade and finance are frequently dollar-pegged, and the Fed is the world’s central bank for all practical purposes. On the one hand, if this dollar-centric global finance were to fundamentally change the U.S. would implode, and on the other hand those around the globe who could fundamentally change it are too deeply invested in it to do so.

VIO, you’re posts are right on the money. (Good pun huh?) I completely agree with you. I would add that all the debt in the short run won’t cause a bout of inflation for some time to come because all the bankers are afraid to make any loans right now. As a result small businesses are failing, AND the banks are buying Treasuries causing their rates to be abnormally low. Also, as you know, the US will NEVER default on it’s debt, it will simply devalue the dollar making the debt more easily repaid.

Government debt is repaid by your descendants at the point of a gun. In this way it differs from personal debt (which disappears when you do) and corporate debt (because corporations — aside from TBTF firms — lack the power to tax). That is why government can borrow more cheaply than the private sector.

Some believe, as you do, that the Great Depression ended when government decided to lever up enough. Others believe it ended when the necessary de-leveraging had run its course. We will find out which eventually, because policymakers clearly do not intend to permit a re-run of 1937.

When the government spends trillions of dollars, it also takes over an ever larger part of the economy. It already owns the U.S. mortgage market, its largest insurance company, and two of the “big three” automakers.

Apparently, our choice is between a Second Great Depression and the state owning everything. I would prefer “none of the above”, but I guess that is not an option; U.S. capitalism has failed.

I suppose now I just have to hope that the Soviet Union failed because it did not have any economists as smart as Paul Krugman and Brad DeLong.

There is no doubt that Samuelson is flat stupid, or is just creating a death spiral argument to suit his Republican conservative friends and allies. If we remember correctly, immediately following WWII we had a very large public debt, incurred reasonably in dealing with the war. Its creation, in addition to winning the war, also was responsible substantially for ending the lingering Great Depression. Now, how did we deal with curtailing that debt? By having very high marginal tax rates (up to 90% of income for very high earners), and were able to tame but not eliminate it.

In order to end this crisis will take many right steps, but certainly one of them is going to be additional stimulus some design (I am not an advocate of any particular approach). But we cannot concern ourselves with “our grandchildren’s future” in making these decisions, since if we fail to act sufficiently, neither they nor we will have any future worth having.

I’ve come to realize that while the amount of our deficit is serious in the long run, under our present circumstances it isn’t. Why? Because it isn’t the amount of debt that matters; what matters is the amount of interest expense it costs to service the debt. In other words the deficits, in for instance the Regan & Bush years, although lower than today’s both nominally and as a percentage of GDP, still carried a much higher percentage interest rate, and thus were much more of a drag on the economy than today’s deficits.

If you really want to understand it better, go to Paul Krugman’s blog or New York Times column and do some searches with “Deficit spending” or “economic stimulus”. If you have probs read slowly and look up terms (vocabulary) you don’t understand. I’m not being facetious. Or you can try to find a cheap used/older edition of Alan Blinder’s macro-economics textbook.

Deficits don’t really drag in a short-term sense (obviously they hurt long-term). They can even stimulate a dead economy. Although the people at FOX news and a.m. talk radio would rather you not be aware of that fact.

I love this discussion and James’s column that provoked it, especially Nemo’s one liner raising the issue of the trade deficit. I’m no expert on why Japan has so much debt, but I know they’ve always made succeeding in world trade a top priority, They
nurture that source of national wealth, while the US squanders it. For the most recent 5 year period -2004 thru 2008 we had a trade deficit of $3.5 trillion and lost thousands of manufacturers and several million good jobs. Most economists except at the Peterson Institute say tis is “unsustainable”, but they don’t do anything about it.I say it’s “national insanity”, to give away our home market like this,especially when it can be fixed.(I’ll explain how in a separate post if anyone is interested. I don’t object to another round of stimulus spending, but it needs to be accompanied by legislation to restore a “level playing field” in US trade. Otherwise trying to revive US small business is like bailing out a leaking boat – it won’t work!
Ken Davis
Former US Ass’t Sec’t’y of Commerce (under Nixon, where our trade problems began)

So we need 1.3 trillion in 10 years to pay off those debts? Where does this 1.3 trillion come from? More treasury bills. even supposing we were running a balanced budget, so long as we have national debt, this is money that can be used to pay down debt, and when it is not being used to pay down debt, it is effectively adding on to debt that needn’t exist.
Japan’s debt is at 120% of GDP. yes, they have a lot of problems, but it’s not because of the debt, which is still basically free for them and has been for like a decade.

This reminds me of the debates I had as an Executive Director of the World Bank on the “Debt Sustainability Framework” designed to calculate what debt load a (poor) country could carry. I hated it for some very simple reasons!

1. It send the subliminal message that as long as a debt is sustainable it is good, which to me is nonsense, that is unless you are in fact working on the sustainability of the creditor.

2. Never ever should a debt be contracted just because it is “sustainable”. It should be contracted because it is estimated to produce good results and repay itself.

3. The sheer notion of calculating the debt sustainability reminded me of a torturer calculating how much he could torture before the victim fainted.

4. What on earth is this about having to go through life carrying exactly the maximum debt weight we can carry? As you can understand any dictator or politician will max up any sustainable credit available. Is a sustainable debt load what we want to legate to future generations?

If the stimulus package had not been extended under the general theory of debt sustainability but more carefully looking for the real point Gs then the stimulus package would have been so much better.

Now if there was no time to look for point Gs, because money had to be placed on the streets no matter what, then I would most certainly have preferred a Friedman helicopter drop, or an equal check to all the citizens, young or old.

Anyhow I agree that default does not necessarily produce economic disaster. The value of clearing the air and providing the next generation the opportunity for rising early singing “Oh what a beautiful morning” should never be underestimated. (This of course is as long as they do not have the “intention” of looking for the same disastrous place where we spent last night. They might end up there anyhow, but that is another issue, that’s c’est la vie)

vio,
You sound like the guys who were telling us before the crash not to worry about paper thin credit spreads and sky high house prices, because all the risk had been distributed via derivatives and the matter was settled.

Smell the coffee man, the dollar is rapidly becoming the old maid in the currency game. Hedge funds are shorting it with impunity to buy assets elsewhere. Oil producers are talking about denominating oil in something other than dollars. India’s central bank is buying 200 tons of gold. The dollar share of reserve assets is falling. Help me out with this, we have just been through the worst downturn since the depression, yet dollar denominated commodities that have seen substantial price gains over the last two years is as long as your arm: gold, copper, corn, soybeans, platinum, lead, tin, silver. Why is that?

If you look around the world, you see a lot of nervous holders of dollars. It won’t take much to turn the steady decline of the dollar into a rout – at which point the notion of 4% interest rates will look quaint.

We may be able to delude ourselves that we can run these massive deficits ad infinitum, but it is increasingly clear we lost credibility with the rest of the world with regard to our fiscal integrity. One of these days, enough people are going to hit the sell button at the right time to make this a real problem.

The amount of debt that a country has outstanding is not in itself a meaningful number to potential creditors because it does not in itself communicate anything about the government’s willingness and ability to repay what it has borrowed. Simple debt indicators, such as comparing debt to economic activity, are also of limited use, because they fail to capture the complexity of the political, social, and economic considerations that lead a country into extreme financial distress.

For my part, I’m not sure how anyone looking at our country’s long-term commitments and economic structure (i.e., our paper economy) can argue with a straight face that we are not headed for a financial reckoning, and much has been written by market analysts (as opposed to political pundits) on this point.

As a country, we do not behave all that differently than a TBTF financial institution. Our debt enjoys a privileged place in the market because of our size and the interconnectedness provided by our currency. We cannot be meaningfully disciplined without some measure of sacrifice on the part of our creditors or bystanders. At what point will the second tier get tired of funding the recklessness of the elite? That strikes me as more of a political question than an economic one. So if you are waiting for someone to quantify a point of no return on US debt, you are probably going to be waiting a long time. I’m not sure that means you should not worry about it, however.

I do not think our level of debt will prevent our political powers from doing something about employment (or at least trying to give the appearance of it by throwing some money at the problem). They are adept at bribing the economic extremes so they can remain in power, which is why being in the middle in this country really bites.

Being in the middle income brackets of this country may “bite,” but I can assure you being in the lower income brackets is much worse. I take perkurowski’s second point to mean that while financing investment out of savings would be preferable, debt is acceptable so long as the investment is worthwhile. In the abstract I think it’s hard to argue that alleviating double-digit employment is not a worthwhile enough investment to incur additional debt (especially if that debt can be taken on at historically low interest rates). The only question then is whether or not the debt incurred by the Obama administration’s policies have been effective in reducing unemployment. For the moment the answer to that question seems to be no. This doesn’t mean we should stop incurring debt to alleviate unemployment, just that we need better policies.

In short, we need a labor policy. Repeating “tax cuts,” over and over again doesn’t count. In fairness to the Republicans, repeating “credit blockages,” over and over again doesn’t count either. At least to my uneducated eyes the events of the past eight years seem to discredit the whole “if you build it they will come,” line of reasoning. GDP growth coupled with a mind-boggling expansion of access to credit did not produce much in the way of shared economic prosperity. That’s a fact. It’s past time the democrats recognize reality and come up with a better idea than: “if we get credit flowing again job creation will ensure.” Bailouts to Wall Street is not a labor policy.

Well, that is exactly it. “Alleviating unemployment” (or the experiences associated with it) may be an urgent concern, but it is not the same thing as changing the structure of our economy to something more sustainable and productive, which is what it will take to offset an increasingly large debt burden (we are, after all, borrowing funds against resources we will generate going forward). So far, addressing unemployment has meant providing welfare so households have a slightly better experience while waiting to find a job that is not going to materialize anytime soon.

This is probably why so many people are fretting about the nation’s borrowing. We haven’t changed anything and it is hard to argue that the political will exists for real change. But let’s keep the masses stuck in some extend and pretend situation and put the cost on the nation’s credit card.

You are wrong about the middle class and will become increasingly wrong once the bill for this crisis arrives.

What I find somewhat baffling is a society where owning a gas guzzling SUV, new home and the latest electronics is considered a norm. While education and health care (which are essential to a functioning economy) are delegated to the status of market goods.

It is like you have a dysfunctional family, with sophisticated income, that shorts on healthcare and other essentials, to subsidize the debts of the gambling addicts in the family.

You can also be baffled about how a country is willing to send sons and daughters to risk their lives in foreign countries while at the same time imposing restrictions on the much needed correct risk-taking of their banks; and which by the way also led the banks to sustain immense losses in the “risk-free” AAA rated territories where they should not even have entered.

Here, Here, Brian…. only comment is that if what you prognostigate happens, GLD (which has questionable Gold holdings) might also be suspect… the rabbit hole of finaacial theivery goes quite deep in many quarters….

They are saying forget about international emissions-reduction targets and focus on providing the green technologies to the developing world. (Dirigisme? Debt hysteria?) This requires investment in research, education, leading to new industries, infrastructure and job creation.

Warren Buffet might have it right. The future may partly lie in railway travel. Here in Metro Vancouver our planners are trying to get people out of cars and into public transit. The region is headed into wall-to-wall gridlock.

They are saying forget about international emissions-reduction targets and focus on providing the green technologies to the developing world. (Dirigisme? Debt hysteria?) This requires investment in research, education, leading to new industries, infrastructure and job creation.

Warren Buffet might have it right. The future may partly lie in railway travel. Here in Metro Vancouver our planners are trying to get people out of cars and into public transit. The region is headed into wall-to-wall gridlock.

Nice analysis. If debt is so insignificant, why is the default of any bond issued by banks a problem?

My own view however, is that we will not face a “day” of reckoning. We will muddle through, probably with stagflation, inflation, or deflation in various goods and services that frustrate all those who want a “universal” theory of the GFC – but it will result in a materially lower standard of living. Why is the price level going down 3% (representing an increase in purchasing power) considered bad, but an increase in the price level going up (and how many people are getting true cost of living increases?) is good? Yes, you pay your debt with cheaper dollars…but the person getting paid has less purchasing power.

My statement about the middle class was that while it may not be a picnic to be in it, being in the lower class is worse. How is that wrong? It seems to me that this statement is a truism. Unhelpful maybe, but wrong?

As to your larger point about the necessity to change the structure of the economy, I couldn’t agree more. However, unless you support the “sectoral shifts,” liquidationist school of thought I fail to see how changing the structure of the economy necessitates double-digit employment. Can we really transform the structure of our economy when nearly one in five people is underemployed? I know it’s hard to gauge capacity utilization, but it seems to me the amount of slack we’re seeing in the economy now is a major macro-economic problem in and of itself. Maybe I’m misinterpreting your writing here, but I get the impression you want to completely separate out short term attempts to stimulate aggregate demand from longer term efforts to restructure the economy. I’m not so sure that’s possible. Although, judging from your earlier posts here on the baselinescenario, you appear to know a lot more about economics that I do so maybe I’m wrong and it is. Just to be clear, I find President Obama’s long-term economic policy to be shamefully inadequate. I think we agree on that. What I don’t understand is why attempts to alleviate unemployment cannot be complimentary to longer term efforts to restructure the economy. I fear that without what you call “welfare so households have a slightly better experience while waiting to find a job that is not going to materialize anytime soon,” the U.S. economy will experience a wage/price deflationary spiral. Allowing millions of people to fall into poverty is not only immoral, it’s bad economics.

My mind isn’t always the sharpest, but I was trying to recall if Professor Simon Johnson had ever said anything about America’s loss of it’s manufacturing base the last roughly 30 years. It doesn’t seem to be a top concern of his, does it?

Do you remember W. Edwards Deming?? I always wondered (and still do) where America would be today if the old basturds at General Motors had bothered to listen to Deming before he packed his luggage for Japan.

Right you are about Simon. Down deep he’s an economist and most economists don’t think past “all free trade is good” and don’t like the idea of a national industrial mpolicy. I mentioned the Pdeterson Institute. Their CEO, Fred Bergsten has
been an all-out free trader ever since he worked for Henry Kissinger under Nixon and I was opposing them in Commerce with domestic industry and the unions> We had a $10 billion trade deficit then. Now it’s $700 billion annually and the debt is $10 trillion or so.
Tha’s what are brilliant economists gave us, and most still won’t admit how wrong they were.
Ken D.

You say, “What I don’t understand is why attempts to alleviate unemployment cannot be complimentary to longer term efforts to restructure the economy.”

They must be complimentary. We cannot achieve a restructure of the economy – at least a healthy one – without addressing employment!

There needs to be a reframing about the purpose of the economy. Does the economy exist solely to strive to create profits for some, or to strive to create a general well-being for the bulk of the participants? In my world, I pick “door number 2.”

This is a drastic veer off topic, but I wanted to make people aware that you can watch LIVE coverage of the Senate debate on health care. It looks like they will have the 60 votes. I believe this is a step in the right direction, and I hope the bill passes. But whatever your individual opinion is, it’s could to know what is happening in your government. If you’re at a loss for other entertaining things to do, or you are just twisted in the head (Like me), here is the link to watch the debate LIVE on C-Span 2

I love how they keep mentioning “Dr. Coburn”. Yes, DOCTOR Coburn. What a joke. These jerks schedule useless office visits to say hello and ask you if you’re still taking your meds, so they can charge you $40. Then I want to listen to what they think about the health care bill?? Freaking hilarious.

People are making way too much out of Buffet’s moves. You know what? He knows the accounting books are clean and that it will have steady cash flows that will adjust to at least equal the rate of inflation for decades. It’s as simple as that.

Another classic. The Republicans say “we don’t want government run healthcare” then in the very next breath say that the Democrats are taking away Seniors Medicare (which is a bold-face LIE). Has anyone told these dim-witted Republicans that Medicare is a government run health care program???

Excuse me, but most of the government spending has gone to save large banks to save them from their own irresponsibility, not for extending employment benefits to the average American. But I suppose if you worked for a financial institution in something related to derivatives, you would rather people not notice that fact.

Read Bruce Bartlett’s new book “The New American Economy: The Failure of Reaganomics and a New Way Forward”

He explains the similarities between the Great Depression and now, and how the Fed back then made things worse by allowing the money supply to shrink. Deflation was the big problem. Something about a decrease in “velocity.”

He goes on to say why the Obama $780 billion stimulus was correct. All this from a former Reagan official and supply-sider.

Hi Uncle Billy:
That’s good multi-tasking to find the HuffPost article. The odd thing is that S.3899 was conceived mainly to force a trade balance. That’s important, but it would also level the competition vs. foreign compabies that have subsidies or currency advantages as maintained by Chin. With level competition and a fair shot vat ourthuge market, plants would reopen, investments could be attarcted and domestic production and jobs restored. That woulod no doubt happen faster than in new “green” industries atarted from scratch. There’s already competition there, with Brazil shipping in most of the turbine blades being used here. I don’t object to some stimulus spending, especially for infrastructure – bridges, dams, etc. that aren’t subject to direct foreign competition. But to put money into businesses that just compete with susidize4d foreign importers is pretty foolish until the level competition problem is solved. Another advantage of S3899 is theat it doesn’t require government funding and more deficit spending. It’s self-sufficient thriugh the import certificates that are required.Last, it is has a huge advantage of being a legislative action we can take unilaterally – no trade negotiations or injury claims to fight for long periods, atc. We just do it! And life moves on with fair sharing of our greatest market the world has ever known. There’s no way we should be losing moore of it every year!
Ken Davis

“Street-corner experts” like Samuelson enjoy great latitude when providing a justification for maintaining the status quo, however vapid and fanciful the claim. Challenging the status quo would simply get him fired.

There are choices Nemo, but no political capacity to undertake them. Don the LibDem basically got it right… if QE _trails_ economic decline, and fiscal policy uses debt to plug the social safety net gap, then the net effect is that we incur massive fiscal debt to keep the economy on life support while we continue to fund those with preferred access to capital (granting them favorable rate loans)… which simply funds a carry trade.

Devaluation/QE must be sufficiently massive that it gets ahead of the carry trade – carry traders must be convinced that enough debt was destroyed that further devaluation will be unnecessary (the alternative is continued capital flight). AND, sufficient fiscal restraint must be shown that carry traders truly believe further devauation will be unnecessary. Neither of these seems _politically_ possible at the moment.

Sure, we _could_ mount a large one-off QE episode, followed by a consumption tax/long term investment credit to restore a proper savings/investment equillibrium.

If we could credibly couple together fiscal restraint, rapid monetary easing, and a shift in our tax base from production (income) to a consumption tax while diverting tax revenue to encourage long term investments… we could escape this. But Team Obama abandoned that option months ago, opting to restore a credit/consumer driven economy. Which, after their campaign promises of a massive investment in new energy/infrastructure, was a sorry dissappointment.

You know, I’ve been puzzling _why_ the current administration followed this path (other than the fact that it seemed to buy into the Summers/Geithner/Paulson arguments about the credit channel being the real key to the modern economy…)

I think it was a political miscalculation. They decided that it was “now or never” for healthcare, and they truly believe that if they do nothing else, it’s OK – so long as they “fix” healthcare. And, they thought they’d get health care done by August.

I very much wish the talking heads would stop talking about unemployment per se, and starting talking about restoring the savings/investment gap. When the savings rate “spiked” to 6.7% (still below the post-war average), we were told “normally that’s good, but right now that’s bad”.

That’s absurd.

Instead of trying to get us to consume more, the administration should be pondering plans to restore the savings/investment equillibrium by getting us to convert our savings to _investment_.

For the last few days, I’ve been turning over the following quote in my head:

“We’ve been fighting with the President’s economic team for months… They don’t believe in infrastructure. They don’t seem to believe in investment. They want a borrowed money, consumer driven recovery… that ain’t happening.”
from Rep DeFazio, linked by fwm…

Depending on the term of the debt, it eventually has to either get rolled over or paid off. The interest rates at which it will be rolled over won’t neccesarily be as low as they are now.

The amount of our debt held by China gives them leverage over the US. By threatenng to sell, or actually selling, a lot of our debt, they can force up US interest rates and disrupt our economy. That will cost them, but sometimes countries are willing to pay a price to affect the actions of other countries.

It’s probably worth it to incur some more debt now in order to mitigate and buffer our economic slide, but don’t let anyone tell you that it’s anything other than a neccesary evil.

1) Do you have any specific ideas about what a policy that “restores the savings/investment equilibrium by getting us to convert our savings to investment,” would look like? I have the bad habit of calling my representatives to complain. After I’m done yelling I also like to offer some constructive advice. I’ve been repeating talking points from:

“Well, that is exactly it. “Alleviating unemployment” (or the experiences associated with it) may be an urgent concern, but it is not the same thing as changing the structure of our economy to something more sustainable and productive, which is what it will take to offset an increasingly large debt burden (we are, after all, borrowing funds against resources we will generate going forward).”

I think you’ve hit the nail on the head. The Keynesian style government temp job is merely the populist version of “bailout Wall Street,” assuming the status quo can be maintained and the good times will continue to roll. They are two sides of the same coin, and neither one actually addresses the root problem.

Unemployed Americans have to contend with a vastly altered global labor landscape. The old simple minded “jump start” may simply no longer work.

True that most contemporary Keynesian economists are free traders. They also hail from certain portfolio watching upper middle class interests. It isn’t hard to see that everything they promulgate is in their interests. Two sides of the same coin.

It makes sense to me that people with more of a stake in their labor and their after-tax take home pay are keen to deny them their easy political points at the cost of increased national debt until they actually begin to address the changed labor landscape in terms that are believable.

I remember the stimulus debates. It was determined there would be one, but no one had any good ideas. It is not unreasonable for the tax paying public to demand real, long term solutions when being asked to pay up.

And this goes for the financial fraud problem every bit as much as for the Keynsian’s lazy minded government temp job “solution.”

Off the topic of unemployment and speaking more to DeFazio’s observation:

One thing that is really disturbing about the administration’s motivation to restore a credit-driven economy vis-a-vis our country’s borrowing needs, is that it is allowing investment funds to serve as back-door conduits for providing government support to private debts. We talked about this with respect to the FDIC, but it seems to be a preferred track for getting mortgages modified too:

On the surface, I can see where people would think this is a great opportunity for the funds to serve a social purpose, but really they are just making a short-term profit from repackaging the loans for government agencies, which could be a liability for the government if (when) things do not really improve on Main Street.

The administration does not really seem to be able to distinguish between having functioning credit markets (i.e., where someone besides the government takes the risk) and financial institutions just taking advanatge of essentially free money and vehicles to transfer risk to the government. All the administration sees is activity.

I agree. And I also think that much of the objection to government spending is that there is no “Door #2″ anywhere to be seen.

Just look at the so-called “healthcare reform” bill. Our “Democratic” majority government seriously seems to believe that handing medium income workers a mandatory health insurance bill constitutes genuine social welfare and not corporate welfare as is apparent to the rest of us.

I see no reason to assume that such a government would not extract punitive taxes from the out of favor political classes, ie., the laboring classes, to continue feeding this rapidly escalating national corporatism that enriches a few.

Can we assure people that’s not going to happen? It doesn’t look like it.

You should see a reply button below a post. If someone wants to reply to a specific message, they usually use that, and it shows up just below. If they start a new comment, it shows up at the bottom.

I’m not sure how it displays on non-web based feeds.

The argument re: Japan is that once you have 120%+ of federal debt vs. GDP, you become very conscious of the interest rate. If the rate goes up, the cost of supporting that debt when it rolls over is quite high. Moreover, the BoJ watches out for the interest of Japanese banks, who also own long term debt-backed assets. All banks engage in intertemporal arbitrage (borrow short, lend long). If the interest rate suddenly rises, banks need to pay more to borrow short term, which can cause their interest rate gap to go negative. (a problem resulting from “maturity mismatch”) Banks would thus go insolvent… That would destroy the credit channel mechanism for injecting money-as-credit into the economy.

The only way to avoid this is for the tax rate to gobble the whole economy (to subsidize new rates on govt debt and the interest rate spread for banks), OR for the BoJ to lend money to the government AND to banks at a favorable interest rate (which creates a risk of very high inflation – I don’t know that I’d call it hyperinflation, unless Japan loses access to international credit markets AND has a negative trade balance).

In other words, the longer the government goes into debt to absorb losses that it incurs to support banks without resorting to necessary currency adjustment (e.g. inflation), the greater the long-term risk of economy-busting inflation.

That is why I think Krugman is wrong to endorse high deficit spending as a second-best scenario, UNLESS that fiscal spending is financed by new money.

My secondary concern is that the Fed _does_ get some gonads and creates enough inflation to restore the long-term nominal price trajectory, BUT we don’t accompany this with structural adjustments to the economy to refocus on savings + long term investments. In that case, we will finance recent debt partly through inflation (which will raise long term interest rates) but the economy will remain a consumption-focused beast.

Unfortunately, we spent 2001-2008 living a lie that our standard of living was our divine right, when it was really financed by divesting the assets of past generations and hocking the assets of future generations.

So I am quite guilty of the “debt hysteria” that James posted about, although my solutions are probably not those of most anti-fiscal-spending conservative pundits.

Re: solutions… Use decentralized information sources to allocate centrally-generated funds. While some funds could be allocated directly (science and technology grant programs, where you can solicit proposals and get the best scientists in their fields to work on grant review committees), others can use matching mechanisms…

For example: Offer states and municipalities a 50% match on _new_ infrastructure investment in excess of the average of 2007-2009 levels. Offer a 30% tax credit or a large deduction on investments in energy investments that meet pollution goals, do not rely on imported energy sources, and are online by a certain time (phase out the credit smoothly). The administration talks up community/trade colleges – put some more money behind them. The tax benefits for home weatherization could be a good idea (subsidizing tearing down dilapidated buildings and replacing them with greenspace would also be a good idea, but would probably draw a lot of political fire). A tax on imported energy would be useful (but politically deadly).

These ideas are out there… I’d thought that the reason we were avoiding them was political expediency (some are unpopular). But I’m beginning to suspect that Team Obama is ideologically opposed to creating an investment-economy instead of re-fueling the consumption economy. (Which is 100% counter to his campaign path.)

They would argue that unemployment is the check on the scenario you’ve provided, no?

As a practical matter, state and local governments could not participate in a matching program on account of their current budget gaps (which will be sustained as long as there is high unemployment and then some).

But I agree with what you are saying here. We need to make a major investment in the parts of our economy that actually produce stuff. Infrastructure, technology, etc. and forget the gimmicks.

So what is becoming clearer by the comment is that the title of this post is wrong as the hysteria is not so much about government debt but about how new government debt is being spent… and clearly those who really should be hysterical about it all, are not, because they trust the parents and their grandparents.

This administration came into office in the middle of an economic downturn and associated financial crisis. They think they have inherited a formula for successfully addressing such situations. But they are simultaneously conforming their policy measures to existing political priorities and relationships that they should have instead set aside.

As a result, we’ve gotten a series of bailouts (which in all fairness began under the prior administration but were perpetuated under this one) and a fiscal stimulus that, at best, has just made some people more comfortably stuck – a point that anyone can see if they are willing to step back from economic indicators and use some common sense.

I think it is worthwhile to be concerned about the level of debt that our country is assuming in light of the fact that our economy has been a total sham and we really are not doing anything to fix that. Unfortunately, people in the political sphere aren’t capable of doing anything besides spewing the same talking points over and over, so you are either in the camp that wants to spend ad nauseam or you are in the camp that is opposed to debt in general for some pseudo-moral reason.

The end result of this is that few people are raising qualitative concerns along the lines of what StatsGuy is saying, like why our solutions are not investment-oriented. The answer to this question is not all that different than the answer to why there has not been a meaningful push on financial regulatory reform – our government has been bought, and it is in the interest of those who own the government to revive the old game.

In a word, the Keynesian Kool-Aid drinkers are saying that debt doesn’t matter.

As I see it, there are plenty of reasons to challenge the apparent indifference of Paul Krugman, Dean Baker, James Kwak, and others to the parabolic rise in public debt, including the fact that the latest crisis, like many of those before it, stemmed from a similar complacency about the risks of unrestrained borrowing.

Our “hysteria,” (although, I think you’re absolutely right about how young people don’t really seem all that upset. I’m young myself and I don’t really find myself getting very worked up about debt. I don’t know why though. Maybe it has to do with the way my generation was brought up) is about how the government is spending the debt. Samuelson’s hysteria on the other hand is either irrational or, more likely, disingenuous. From reading Samuelson’s editorial I get the impression he just wants to use the current crisis as an excuse to gut the social safety net. Pretty typical behavior for a lot of conservative pundits.

StatsGuy,

Thanks for the explanations, I appreciate your taking the time to educate me.

To be fair to the Democrats, they took a lot of political heat from the Republicans about how spending for infrastructure improvements is not “real stimulus,” because its effects are not felt immediately. The Republicans’ preferred stimulus was an immediate pay-roll tax holiday to stimulate aggregate demand. Then there were the Republicans who didn’t want to do anything at all. Just liquidate everything and let the markets work it out. In fact, I can’t think of a single substantive idea the Republicans have come up with throughout this entire crisis. True, the Democrats have failed to come up with much in the way of new, creative ideas, but the Republicans don’t even have a plan.

People who don’t have any leg to stand on resort to personal attacks. Let me know when you have become knowledgeable enough to argue on ideological or logical grounds. I attack Republicans because they are very worthy of attack. And I will CONTINUE to do so as long as their answer to every question under the sky is “no”. Except of course when meeting with bank lobbyists behind closed doors, in which case Republicans can only say “yes”.

Don’t forget Mr. Klein, Republicans passed the Homebuyers Tax Credit, which did almost nothing to help new home buyers, and was basically a gift from the government to Bankers and realtors. Remember Republicans are not against “big government” when it helps their friends. Read the story by Rex Nutting of MarketWatch at the link here. http://www.marketwatch.com/story/kill-the-wasteful-home-buyer-tax-credit-2009-10-20

Re: budget gaps, taking advantage of a matching program would require referenda or tax increases, but the matching would generate a large revenue influx which would counterbalance this. The net effect would be something like forced savings/investment (though states and municipalities could opt out). As I said, quite possibly unpopular with many groups opposed to an increased role of government.

I will say this – back in Dec 08, we _did_ need some level of fast spending-focused stimulus just to end the panic (or, even better, a signal that the Fed was not deaf, dumb, and blind – which we finally got in March).

The current situation is not about stopping a panic; it’s about two things… monetary disequillibrium and structural adjustment. Someone has to make the case for serious changes to shift away from being a consumption focused economy, and I dare say that many Americans would respond strongly to such an appeal. But the country is mired in the health care debate for the next 2 months (at least).

This sort of misses the point. The US economy might be like a bathtub in which a massive amount of water gets recirculated on a daily basis, but a small amount leaks out through the trade-deficit drain. Over time, the secondary effect dominates – the bathtub will be empty and the massive recirculating machine (retail sales, real estate, etc.) will have nothing to recirculate.

Second, I think the wage-stickiness mechanism dramatically understates the asset price mechanism when the economy is relatively open. Thus, IF the rest of the world is growing and US share of world demand declines, it’s quite possible to find ourselves seeing commodity-push inflation.

Notably, this latter point would require even greater decoupling of world trade (China, for example, developing non-US markets to earn foreign exchange to buy commodities). Early declarations this was happening in 2007/2008 were badly mistimed.

But just because Peter Schiff was early doesn’t mean he’s an id1ot. Although he is an id1ot. Even so, just because he’s an id1ot doesn’t mean he won’t eventually be correct.

But I’m not arguing about the next 5 years – I don’t think that’s the danger point. I think it’s after 5 years, and I think the bond market agrees with me if we look at the yield curves.

I’m reading Ron Chernow’s biography of Alexander Hamilton. Interestingly enough the issue of public debt has been part of the American debate since the beginning. I guess the fact that 55% of the budget being for debt service payments back then had doomed America’s prospects for prosperity.

Hate to be rude, but Obama was a dupe. And I’m sick of him. Bailing out Wall Street, falling all over himself to save the financial system. What a bunch of bile. Tell me, what would a so-called failure of the system have looked like. It would have been a stinking average reorganization of a handful of corrupt firms, flush them down a toilet and reconstruct honest productive capital firms in their place. Obama is typical of stupid democratic Presidents, Carter,…. Clinton, Obama. A pack of pandering pansies.

I’m sorry to be so slow in continuing our discission. The oponent sf S.3899 have mostly been the economists whose knee-jerk reaction is Oh it’s “protectionist”. Then why is it accepted as within the WTO’s guidelines Sure it “levels the playing field”, but it doesn’t pick any industry or country to block out Really it’s asking the world to share in the operating expenses of the world’s biggestr market. I hope to present the pro arguments to the Obama Jobs Summit. Would you like to join me? (Just kidding I’m the one sticking his neck out. I’m prepared for it”).
all the best,
Ken Davis

Obamar is not handling things right. He needs business mind to deal with the financial mess instead of creating debt and printing dollars. The author of ” Why Life Events are Predestined and How Our Universe Originate” had some very efficiency ways to solve the problems. She believes government should directly decrease unemployment rate, can’t depend on business to do it by chance. One of her proposal is:
government builds up retirement homes. The construction process will create jobs right away. Retirement home provide free house and encourage earlier retirement that will leave 100 jobs open immidiatly. Government can also use that to substitute
social security checks in long turn. Assume one retirement home have one hundred studios cost 3 millions dollars. People live in there for free instead of receive $700 social security check every month. Every year government will save $840,000. Within 5 year the government will get back its investment and it can use the facility to exchange for social security payment for at least 50 years. Encourage people retire at 55 years old is what Chinese Government doing, it can improve elders living standers. Think about how sad a 65 years old person have to take public transportation to work every and have to running around to looking for jobs.
What the author means is government should use their funding to accumulate their assets, properties and using those facilities to help people who need helps. The construction projects can include factory facilities in high unemployment area. Provide that to business for free, help them to set business relations and provide them minimum wage labors. Government can share the profit late. Government should use their fund to back up business directly instead of giving out to the motor purchase.
Government once spent 3 trillion dollars to encourage people throwing away their cars. The result was: One of the motor company claimed that they increase 100 jobs for the stimulate policy. After the policy stop the car consumption rate went down again. away. What our government did is stupid. It make me sick.

Obama should let people share government jobs in this moment. This is another direct way to decrease unemployment rate. We can’t expect business own to create jobs because that is not their obligation. Their goal is making profit. If they can have profit through oversea investment, international trade or from stock market, why do they bother to create jobs– dealing with unions or labor department. This is a new trend that our government has to facing. In some way government should step out to run business. Not hire people directly but financially help any good business ideas. Encourage college students present business proposals and help them to set up business relationships. If the proposals works government share profits. If that sounds like socialism, that is fine.As long as it can increase jobs and brings in assets and profit for the government.

The third way government can do is to open door to the immigrants who invest one million plus in our real estate market not to those who take our jobs and spend our money. For saving us from bankrupt we have no choice but show this discrimination. When we recover we then think of helping the poor immigrants not at this moment.

The Great Depression ended on September 1st 1939 when Germany invaded Poland and the US began spending huge amounts of money on the tools and weapons of war that we were basically giving free of charge to England and France until December 1941.

“I dare say that many Americans would respond strongly to such an appeal.”

This comment reminds me of Carter’s much maligned “malaise,” speech. Conventional wisdom is that this speech cost Carter the election, but if you go back and look at the poll numbers a MAJORITY of Americans actually responded quite positively to Carter’s call to reexamine American values. Of course it was Carter who really started the U.S. military buildup in the Middle East to ensure easy access to cheap oil in the first place. We all know how that turned out.

You are speaking of the largest government stimulus package in U.S. history of course. Very similar to Keynes’s parable of spending government money for workers to dig holes and filling them back in being useful in stimulating an economy with a lack of sufficient demand.

The other side of the idea of supporting a stimulus has to be balanced with the bogey word…taxes. Once the economy has recovered it is then time to bring more revenues back into the treasury. During the 90’s those spendthrift Demlibs did just that without harming the economy and causing a recession. Continuing that course after 2000 would have put our country in a much better position today than it presently is.

Very difficult to have done what you propose when doing so would have raised even louder cries of “Socialism” when the government took over and liquidated those firms like Wells Fargo, BOA and others in an average reorganization.

Something akin to the S&L resolution trust would have been nice. Politically it should be remembered that was stumbled on after some time and was not an immediate solution to the S&L crisis. Calling that a crisis in comparison to late 2008s debacle is like comparing a rubber dinghy to the USS Enterprise.

If that would be the case why international institutions and commercial banks had been making a fuss about external debt of developing countries? US is now in a similar case and its twin defcits and external debt is in Chinese hands.

Those who do not worry about deficits fail to explain a) their concept of sustainability of deficits, debts and solvency b) the correlation, if any, between increasing deficits and debts and creating jobs c) what if, in the worst scenario, US bond vigilantes (Chinese) decide to dump dollars and treasuries, which ends up in situations of “self-fulfilling solvency traps”.

Cal is hosed, largely because it’s been on the receiving end of thirty years of getting back 75 cents of every dollar of federal taxes it pays, while states like Alabama get back 1.30… That is one of the bad side effects of a federal tax structure that does not compensate for cost of living. An 80k income in rural Michigan or Kentucky buys you a nice lifestyle. In LA, you’re a pauper. But you pay the same income taxes.

The relationship of California to lower-cost-of-living states is much like that of US to China, except that California does not even have the currency devaluation mechanism to release pressure. Making it reasonably likely to default.

I’m sorry; I was under the mistaken impression that inflation was an increase in the money supply, not an increase in prices, which are a consequence of said inflation. Surely asset and commodity prices couldn’t be signals of inflation…

You comment is correct but have no any ideas to help us. Below is the ideas please read it.

Dear President Obama:

You promise to make changes when you ran for president and it seems you did nothing new after you get into the position because you are still controlled by the old concept of consumption. This financial crisis is obviously due to over consumption. Seeking a high GDP has made our earth, our country, our banks and our people broken. Saving the economic by stimulating consumption therefore is wrong. Just like little Bush led us to wars you are leading us in the wrong direction and America can not afford to pay for these kinds of huge mistakes again and again.
At this moment, government can not rely upon any business company but has to deal with the unemployment problem directly. Creating jobs in not business owner’s obligation. Their goal is to make profit. If they can simply make profit from oversea investments, from international trading and from the stock market, why should they bother to create jobs – dealing with unions, labor department and health insurance companies? This is a new trend that we should have noticed a long time ago. Stimulating consumption will help people in the other countries get jobs only. Capitalists will not come back if rent, minimum salary rate and health insurance rates do not go down in the Unite States.
Government should directly create jobs instead of giving out money to the banks and to the cars or houses purchases. The easiest way is to let people share all the government jobs. Government jobs paid by tax payer’s money should benefit as many people as possible at this moment. New York City employee’s average annual income and benefit combined together is $100,000, money that can support two to three families. Another fast way to stimulate the real estate market is to give citizenship to foreigners who invest two millions dollars in our market.
Government should use capitalist concepts and socialist mind to solve problems at this special and new situation. At the last few chapters of a book “ Why Life Events are Predestined and How Our Universe Originated” has some very good methods to deal with this financial mess.
Using fund that we bail out banks and funds we gave to the cars or houses purchasers we can build up government own properties such as retirement home or factory facilities. To the people who willing to retire earlier (55 years old) we can provide them free housing and substitute that as social security checks before they are 68 years old.(people who unwilling to accept the deal get nothing before 68 years old) The retirement homes can be built in the place near colleges and let students learn things by participating in their management. Every week they have trip to the city or somewhere. Retirement homes have different levels base on the social security that people contributed. It will provide garden, cooking, dancing, computer course, and poker games there. People can transfer to different retirement homes all over the country and can register in with friends.
In case we build up 10,000 retirement homes in all over the country, the construction projects will create up to 1,000,000 jobs immediately. In case every retirement home has one hundred rooms that will encourage 1,000,000 people to retire and leave their jobs open. We can use government’s land in suburbs and use the labors of those collecting unemployment to build the retirement homes. In case each retirement home cost 3 million dollars and that allow us saving $700 dollars from each person every month. One hundred rooms will create $840,000 indirect income for the government each year. Within five years investment in a retirement home will be returned and these kinds of government own property will continue substitute for social security checks for at least 50 years. That means it will create $37,800,000 for the government in long term.
We can also build up factory facilities in the places where there is a high unemployment rate. Those facilities can be used for free for the businesses that are willing to create jobs for the market. With the free rental and minimum pay salary rate businesses should have better chances to make profits. Later government can share the profits and get the rent back.
We can also encourage college students and youth to compose business ideas. Government should back financially those practical ideas, helping them to build up connections. Government is entitled to share profits later. All these processes government are not directly hiring people and can avoid deficit like which occur in the post office.
The base idea is that government should give up the non-profit concept. Government’s function is no longer collecting tax and spending it. Government should use their fund to accumulate asset and properties and use that to help society in the long run.
Please reevaluate the previous policies we used for saving the economic. Three billion dollars we used for stimulating car market. During that time one of the auto companies claimed that they had ready increased employment by about 100 jobs. Even that seems to be temporary because after the policy of “ cash for clunker” ended the rate of car consumption went down 17%.
All you did is print dollars and create debt and that is what anybody could do in your position. Please be smart, viewing things beyond the box and give us new concept as you promised. I still have high expectation of you because I can tell that you want to do something that is new. This is the time but it is determined by what you actually do.

Pia Fields- author of “Why Life Events are Predestined and How Our Universe Originated”